Unseasonally high natural gas prices have narrowed margins andcaused defaults by unhedged marketer customers, resulting in a$24.4 million second quarter loss for MCN Energy Group’s energymarketing division.

The loss includes $14.5 million in potentially uncollectibleaccounts, mainly from several smaller energy marketers who wentshort on gas and were caught by the high prices, according toStewart Lawrence, MCN’s director of investor relations. He wouldnot reveal the names of the companies, but said they were marketersto industrial and possibly some residential customers. He said thelosses were listed as uncollectible and acknowledged thepossibility that some of the companies could end up in bankruptcy.

The current market conditions also are forcing MCN to change thevaluation and use of its extensive market area storage assets.

In announcing its second quarter results last week, MCN said ithad changed accounting for its storage inventory from last-in,first-out (LIFO) to the fair-value method, and adoptedmark-to-market procedures for financial transactions based onstorage. This reflects a change in operating strategy to maximizeearnings from storage through financial rather than physicaltransactions. Because of the changes results are not comparable toprior years.

“The LIFO accounting method had the unusual effect of creatinginterim paper losses or gains,” MCN Chairman Alfred Glancy III saidin a prepared statement. “The new accounting treatment, on theother hand, serves to remove this variability: as the value of gasin inventory moves up or down, the value of financial transactionstied to those inventories tend to move in opposite directions andin similar amounts, largely canceling each other out.”

The traditional practice of putting cheap gas in storage duringthe summer months to sell it for a higher price in the winterdoesn’t work when prices in August are 20 cents above the Februaryfutures price, MCN executives explained in an earnings conferencecall last Monday. Not only “seasonal, but geographic basisdifferentials are shrinking,” Stewart said. This has resulted in”continued narrow margins, going from bad to worse” in thecompany’s energy marketing division, which handles transportationand storage. Gas distribution also was affected by the higherpriced gas purchases.

MCN, the parent of Michigan Consolidated Gas, reported anoperating loss of $22 million or 25 cents a share, which was offsetby asset sales that resulted in earnings on the plus side of $22.2million or 25 cents a share.

A merger currently is pending between MCN and DTE Energy, parentof Detroit Edison, which would create the largest electric and gasutility in Michigan. The merger, announced Oct. 5, 1999, isexpected to close before the end of this year. MCN recently soldcogeneration and gathering interests as part of its mergerpreparation.

Company officials participating in the teleconference Monday,including DTE representatives, said merger plans were progressing,with Federal Trade Commission review currently under way.

A prepared statement by DTE Chairman Anthony Early Jr. saidMCN’s performance was not a concern. “In our estimation, thelong-term earnings power of these businesses is not significantlyimpacted by the conditions we are seeing in today’s natural gasmarkets.”

Ellen Beswick

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